Goods and Service Tax (GST) explained in layman terms

The 122nd Amendment of The Constitution Bill, 2014 which is commonly known as the Goods and Service Tax which proposes a unified tax system subsuming the existing tax systems which is expected to come to existence from April 1, 2017.

The Goods and Service Tax Bill has been passed by the Rajya Sabha. This post discusses about the GST bill for the Common Man.

I have been following the GST Bill religiously since it was first introduced by the Modi-led NDA government in 2014. But there is a lot of ambiguity in the details revealed about the GST Bill. To make things simple about the GST Bill we will discuss in detail about the GST Bill in this post in the simplest terms. The post is quite long but I promise you won’t regret investing time in reading this post.

Why the GST is considered as the single biggest economic reform since independence even surpassing the 1991 open market reform?

India has one of the most complex taxation systems in the world. Our country ranks around 135th best place to do business in the world, despite having the best quality cheap labour in the world (labour cost is cheaper than China too….). But our tax system is a complete mess. I have depicted pictorially the existing system (tax on tax) and the new GST system of taxing in India.

Illustration of the existing tax regime in India.

In the existing tax system, the tax is added at each level, which gets added to the selling price. The product when again sold is charged with the tax already on the product initially, thereby making a tax on tax system which is unfair, so we end up paying around 30 to 35% of tax on each product.

Illustration of the GST regime in India

On the GST system, the tax is acting only on the value addition on the product and the tax paid initially for the product is not taxed like we see in the above example, even after taxing the product at regular intervals, the final tax percentage on the product remains the same as promised by the government.

The above two illustrations speak everything about the existing tax system and the new tax system to be implemented in India.

For GST: Which are the taxes that are subsumed in this process.

Both state and central governments will forego the below listed taxes on various manufactured and imported products in India except for:

Petroleum Products (may make an entry in the future amendments)

Harmful to human health products like consumable alcohol and tobacco

Purchase Tax on various goods on which few agro-states are dependent on

Central Governments will give up:

Central Excise Duty — For Manufacture/Production of goods in India

Additional Excise Duties — For goods of Special importance

The Excise Duty levied under the Medicinal and Toiletries Preparation Act — For Medicinal and Toiletry products

Special Additional Duty of Customs — It is levied in place of Sales Tax at a fixed rate of 4%

Surcharges — Added on the existing taxed product for various reasons.

Cesses — Examples like Krishi Kalyan Cess, Swacch Bharat Cess

State Government will give up:

VAT: Value Added Tax on sale of products

Entertainment Tax: This tax is levied on movies and broadcasting networks

Luxury Tax: On imported products, expensive cars, etc…

Taxes on Quick Money making sources: This includes Betting, Gambling and Lottery

State Cesses and Surcharges

Octroi or Entry Tax: As the name suggests for entry of goods in a particular city, district, state or region

How has GST come to reality in India — A brief timeline

A 16 year long journey for GST in India expected to complete with the implementation in April 1, 2017

Goods and Service Tax in the World

GST has been implemented in over 160 countries in the world.

France is the world’s first country to implement GST in 1954.

Over more than 160 countries in the world have implemented GST but surprisingly United States haven’t yet adopted a uniform taxation system.

According to an IMF report, they have discussed about the GST in 7 countries, namely Canada, Czech Republic, Hungary, Israel, Poland, Romania and Turkey. A brief summary of what were the salient features of the GST implementation.

Country

Inflation after GST

Type of GST

Factors for GST Implementation

Economic Crisis

Exchange rate system

Support from IMF, CBs, etc…

Canada

High

Dual

—-

No

Free/Managed Float

No

Czech Republic

High (13.1%)

National

Economic Crisis

Yes

Managed Float

Yes

Hungary

High (10%)

National

Progress to reduce inflation

No

Horizontal Band

No

Israel

High

National

No

Horizontal Band

No

Poland

High (12.2%)

National

Credibility for disinflation

No

Free Float

No

Romania

—-

National

Heavy Capital Inflows

No

Managed Float

Yes

Turkey

High (80%)

National

Economic Crisis

Yes

Crawling Peg

Yes

Few countries have Dual GST like Brazil, Canada and now India, whereas most of the nations in the world have a National GST system.

Dual GST is applied in countries with a federal system of government. In this system the states levy a tax on a selected goods and services and centre levies another tax on the same goods.

National GST is a system in which countries levies a tax on the goods which is later distributed among the respective domains later.

Why India preferred Dual GST over National GST?

National GST would have united the country under one tax, but could have caused various other problems like

States lose their federal powers to run their states on their own way.

Profit sharing may become uneven due to political, economic and social reasons.

The state governments lose enthusiasm to gain more business in their respective states, thereby restricting growth to only some major hotspots.

What is CGST, SGST and IGST how does it work?

All the current Central government taxes will be subsumed into Central Goods and Service Tax (CGST) and State government taxes will be subsumed into State Goods and Service Tax (SGST).

Inter State Goods and Service Tax is a new model in which the tax share will be accordingly divided between Central and State Government.

The working model of IGST

Advantages of IGST

Clear transfer of tax due to the uninterrupted ITC chain.

No refund claim by the exporting state as ITC has taken care of substantial blocking of funds and upfront payment of taxes.

It can be adopted as a B2B or a B2C transaction according to the convenience.

United Vote in the Rajya Sabha

It is a big victory for the Modi government as the entire house voted for the GST bill. Out of the 245-member strong house, members of the AIADMK walked out before the voting. But the 203 members of the house have voted in favour of the GST.

Some media analysts say that Congress supported the bill for two reasons, firstly being not isolated and termed as an anti-progress political party and the GST implementation has brought inflation in many world nations so they can justify that the present government is inefficient to handle inflation in the national elections in 2019.

Rajya Sabha voted for the GST

For all the naysayers, firstly we must see that the Modi Government has brought all people on-board to pass the Constitution Bill, 2014. The opposition came up with constructive criticism and solutions for the betterment in the Bill. As both NDA and UPA claim rights over the bill, it was finally passed with the support of both the major alliances.

It is an answer to the world and our neighbours that we Indians may have differences between ourselves, but when the entire focus is on India, we stand united.

The GST is expected to come in-force on April 1, 2017 and the GST Network is being developed by Infosys.

What for the Common Man in GST?

On which products will our pockets be happier and those which would burn a hole in our pockets….. Keeping an expected GST rate of 20%

Product

Tax % now

Salient Points

Benefactors/Losers

Automotive Sector

30 to 50

Less number of taxes and hassles like Excise Duty, Octroi, etc…

Indian Auto manufacturers like

Maruti Suzuki

Bajaj, Hero

Askok Leyland, etc…

Cement

27 to 32

Expected to reduce logistics cost due to uniform taxes and no Octroi, Excise, VAT in different states

Ambuja Cement

Ultratech

Associated Cement Companies (ACC)

Entertainment

22 to 24

It will reduce many regional taxes and help in reduction of ticket prices

PVR

Inox

Big Cinema, etc…

DTH Providers

22 to 25

Reduction in prices for your favourite channels

Dish TV

Videocon d2h

Tata Sky

Airtel Digital

News Media

No tax now

After GST, taxes may make your favourite newspaper costlier

Aajtak

Zee News

Deccan Herald

Times of India

Telecom

15

Say goodbye to cheap rate phone calls and data packs as existing telecom companies are going to face the heat of both GST and Mukesh Ambani’s ambitious Reliance Jio

Airtel

Idea

Vodafone

Please don’t forget to subscribe to my newsletter if you liked this post (I won’t trouble you much). Download my new eBook titled “25 Years of privatization in Indian Television Industry” by clicking on the link in my blog. It speaks about the entry of transnational and domestic players in the broadcasting space ending the monopoly of the government-run DoorDarshan since 1991.

Share on Facebook, Twitter and Google Plus (It takes less than two minutes to do so). Share your views in the comments window below.